China's long march to innovation success

China's journey from a seriously poor, insular, economy to the "shop floor of the world" took a little more than two decades. Today, less than a decade later, it appears poised to evolve into becoming a leading global innovator. But can China actually make this next great leap forward?

Many observers think that China is ripe for innovative leadership. TomsonReuters observed, on the basis of patenting trends, that: "an epic industrial revolution has brought China to its current state of development, but it will be China's intellectual revolution that will carry it forward." Further analysis of this same data (recently posted by Mark Perry) would certainly support the view that China appears to be fast becoming a global innovation power.

Yet, since it has long been useful to consider both the rate and direction of innovative activity, it pays us to ask whether, given that China's rate of innovation appears (at least as far as patenting is concerned) to be rapid, the direction of this activity can give us a better sense of what is really going on?"

This is important because there is a big difference between creating new ideas (so creating value) and capturing the value associated with these new ideas.

As the Financial Times reported recently, many of the Chinese patents counted are utility patents, and do not represent significant new contributions to knowledge - in other words, not value creation. Furthermore, at least one observer on the scene has reported that Chinese government authorities are encouraging the disaggregation of patent applications in order to boost the numbers of patents being produced.

In August 2011, INSEAD's Global Innovation Index ranked China just 29th overall in innovation (with Switzerland in first place and the US in seventh). According to this analysis, although China's innovation benefits from growing market and business sophistication (for a middle-income economy) and a lively financial sector, there are disadvantages associated with social infrastructure deficiencies relating to innovation-related institutions and human-capital development.

So it would appear that while China might be becoming more productive in generating patents, these may not necessarily translate into economic impact. On the other hand, China ranks first as the world's top "importer of R&D," which would be appropriate for innovation strategies based on value-capture.

I recently had the opportunity to work with a number of senior Chinese high-tech industry and government officials and I asked their opinion of China's innovation trajectories in terms of creating versus capturing value. The chart summarizes the outcome of that discussion in a very impressionistic manner - placement on the chart is indicative of direction only, and is not meant to be precise in terms of being point-estimates of achievement.

Interestingly, there was no disputing the role of appropriating the ideas of others to build China's innovative capital, as evidenced by the clustering of many of China's new economy champions in the lower left-hand quarter. Bu this is not so surprising: many Western firms also owe their historical origins to the ideas of others. Google, for example, was judged by my Chinese observers to have originated by building upon the prior search-engine innovations of others, but then, as the arrow indicates, has subsequently grown through mastering the ability to both create and capture its own value - something that few of the Chinese firms have apparently achieved.

But what is more notable about these impressions is that all but a handful of the Chinese firms are essentially only capturing value in the Chinese domestic market. They have, to date, been unable to launch strategies to create value and they have not been very successful in capturing value outside of the Chinese domestic market.

This could start to change, however. Baidu announced earlier this year a new "box computing" strategy aimed to differentiate it from Google, and Sina Weibo has recently entered the Japanese market and is rumored to be launching an English language rival to Twitter. If these are, in fact, realized then perhaps we'll see more value-creation in the growth trajectories of Chinese firms?.

Also interesting is that Lenovo and Huawei, two of the Chinese three firms most "northeast" in their location on the chart (both creating & capturing value — presumably where we would find the most sustainably successful innovators), would probably regarded by outside observers as being the least "entrepreneurial", the least "new economy", and the least "independent" of all of the firms represented. If we had added Haier to this set, the results would have been similar. So much for the innovation stereotypes so cherished in the West!

Increasing the "rate" of inventive activity will only get you so far. In order to make it big on the global stage, a nation's firms need to be able to capture the economic value associated with that activity. This means investment into organizational design on a global scale, establishing brand visibility, building worldwide supply chains and channels of distribution, and all of the rest of the complex set of activities that go into making a successful multinational corporation.

Two years ago, Rebecca Chung and I reported that experienced Chinese managers participating in CEIBS's (the China Europe International Business School) EMBA program appeared considerably less optimistic about China's prospects as a global innovative leader than did a similar set of their peers in IMD's EMBA program. Some 66% of the 53 CEIBS' EMBAs saw China's near-term future as "staus-quo", while only 18% of their IMD peers agreed with this assessment.

Perhaps what the Chinese managers saw, that outsiders in their enthusiasm missed, was that increasing inventive activity might well be the easiest part of successful innovation, and that it is indeed a less glamorous and more managerial long march to becoming able to realize the value associated with that increased inventive activity.